OREANDA-NEWS. Fitch Ratings has assigned an 'AAA' rating to the following Raleigh, NC (the city) revenue bonds:

--\$41 million combined enterprise system revenue refunding bonds, series 2015A;
--\$50 million combined enterprise system revenue refunding bonds, series 2015B (Forward Delivery).

The bonds are expected to sell via negotiation the week of March 9. The 2015A bonds are expected to close on April 30, 2015, while the 2015B bonds are expected to close on or about December 2, 2015.

Proceeds will be used to advance refund all or a portion of the outstanding series 2006A and current refund all or a portion of the 2006B bonds for interest savings and pay issuance costs. Savings are expected to be taken annually.

In addition, Fitch affirms the following outstanding ratings:

--Approximately \$650 million combined enterprise system revenue bonds (prior to the refunding), at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from net revenues of the city's water and sewer system (the system).

KEY RATING DRIVERS

STRONG SYSTEM MANAGEMENT PRACTICES: The system is well managed, as evidenced by adherence to prudent financial policies, willingness to implement rate increases, and sound long-range resource and capital planning. Fitch does not expect recent changes in key personnel will result in any changes to these practices.

STRONG FINANCIAL PERFORMANCE: The system has generated over 2.0x debt service coverage (DSC) on the bonds and more than 1.6x coverage of all debt in each of the past three years. Ample liquidity and affordable rates provide financial flexibility. Future financial margins are expected to remain in this range.

SOLID ECONOMIC SERVICE AREA: The city's economy is deep with an extensive government, university and healthcare presence. An extensive transportation network, proximity to the Research Triangle Park (RTP), and a highly educated labor pool are important to sustaining the healthy employment base.

SIGNIFICANT INFRASTRUCTURE INVESTMENT AND CAPACITY: The system benefits from an abundant water supply and ample water treatment capacity and continues to meet all environmental and regulatory requirements for drinking water quality and effluent discharge standards.

ELEVATED DEBT; ADDITIONAL CAPTIAL: The debt burden remains above Fitch's medians for 'AAA' rated water and sewer utilities. A slow pay-out rate of existing bonds and expectations for additional debt to fund capital needs ensures debt levels will stay high for the foreseeable future.

RATING SENSITIVITIES

SHIFT IN FUNDAMENTALS: The rating is sensitive in shifts in various credit fundamentals including financial and debt management. The Stable Outlook reflects such shifts are unlikely over the near term.

CREDIT PROFILE

The city owns and operates a potable water distribution and wastewater collection, treatment and disposal system, serving the city of Raleigh (general obligation [GO] bonds rated 'AAA' by Fitch), several communities adjacent to the city, and portions of Wake County (also rated 'AAA'). The system's customer base is stable and mostly residential.

STABLE SERVICE AREA, ROBUST ECONOMIC UNDERPINNINGS

Raleigh, the county seat of Wake County and the capital of North Carolina, is located in the north central part of the state adjacent to the successful RTP, which serves as an important economic engine to the region's 1.8 million residents.

The city's economy is robust, boasting a skilled labor force and an employment base concentrated in service sector jobs related to government, education, technology, health care, and other professional services. Employment growth trends following the recession have accelerated over the past two years resulting in an unemployment rate for the city of just 3.9% in November 2014. Wealth and income levels are consistently above the state average and approximate the national average.

STRONG SYSTEM MANAGEMENT AND FINANCIAL PROFILE

Financial performance has been strong over the past three years as the system has largely distanced itself from recessionary pressures and prolonged drought conditions in 2007-2009. The recession slowed new customer growth and the statewide push for water conservation in 2008 prompted multiple years of declining water consumption. The city responded favorably to the adverse conditions by imposing a series of sizable rate hikes to boost revenues. In total, user charges have been raised by about 70% since fiscal 2009, and since then revenue growth has been strong. The system ended fiscal 2014 with over \$100 million in net revenues, producing 2.5x DSC for the bonds (DSC was 2.1x all-in).

Adherence to the updated financial policies, which include a minimum 2.0x senior lien DSC requirement (up from the prior 1.75x threshold) and higher fund balances are viewed favorably by Fitch. Liquidity has improved substantially over the past several years, and coupled with affordable rates provides the system with significant financial flexibility. Unrestricted cash more than tripled since fiscal 2010 to more than two years' cash on hand in fiscal 2014. Fitch expects the system will maintain higher financial metrics that are more in line with Fitch's highest rating.

Long-term capital planning, financial and rate forecasting, and policies regarding the use of variable rate debt are also viewed favorably. The city annually updates its 10-year capital plan and routinely undertakes a rate study and pro forma financial forecasts. An asset management plan was completed in 2013 that informs the capital plan. Updated financial projections provided by the city show DSC will hover near policy targets. The forecast assumes additional debt and further manageable future rate increases.

Rates, which are set by city council and consist of a monthly service charge, inclining block volumetric charges and recently implemented fixed infrastructure replacement fees, remain low despite sizeable increases in recent years. The city has raised rates systematically with expectations for additional rate increases to continue to allow for the full cost recovery of the system, including provision for sufficient pay-go funding of routine repair and replacement.

STRONG SYSTEM CAPACITY FROM SIGNIFICANT CAPITAL INVESTMENT

The system benefits from an ample water supply derived primarily from Falls Lake, a multi-purpose reservoir owned by the Army Corps of Engineers (ACE) and to a lesser extent, lakes Wheeler and Benson. The three reservoirs are projected to sufficiently meet the city's needs through at least 2030, and perhaps longer as the city continues to focus on future resource development as part of its long-term strategic planning. Additional near-term supply options include use of reclaimed water and additional allocations from existing sources. The city has exclusive contract rights to purchase Falls Lake water from ACE.

The system's two water treatment facilities have a combined capacity to treat up to 102 million gallons per day, roughly twice the average daily demand for 2014, and well in excess of typical peak usage. The city's wastewater treatment plants (WWTPs) are capable of meeting current customer demands with expansion being added that will ensure capacity for the foreseeable future.

ELEVATED DEBT LEVELS PROJECTED TO RISE

Debt levels are somewhat higher than is typical of utility systems rated 'AAA' by Fitch, although this concern is somewhat offset by adherence to sound financial management policies and the significant flexibility provided by ample liquidity and a low rate structure. Historical leveraging was needed to keep pace with prior growth patterns, and as a result debt levels are \$2,200 per customer and about \$1,300 on a per capita basis in fiscal 2014. Debt to net plant is also relatively high at 59%, which is more than double the median for 'AAA'-rated systems. Debt carrying costs are a manageable 26% of gross revenues and are projected to rise slightly in through the financial forecast.

The system has solid debt policies including limits on variable rate debt and the use of swaps to hedge against interest rate risk. Currently, 20% of the system's total outstanding debt is issued as variable rate demand bonds (2008A and 2008B bonds), which is manageable. The bonds have liquidity facilities provided by Wells Fargo (Issuer Default Rating of 'AA-' by Fitch) through late-2015. The city has already approached Wells Fargo about renewal options, and Fitch anticipates the city will have no issues extending or replacing the liquidity facilities given its strong credit underlying characteristics and local banking relationships.

Two fixed payor swaps - Citigroup and Wells Fargo are the counterparties - have a total current mark-to-market valuation of negative \$36 million, which is somewhat high but easily covered by the system's strong balance sheet resources.

Leverage is projected to climb further with an additional \$370 million in new debt over the next five years to finance the majority of the system's \$592 million capital improvement plan (CIP). However, according to the city the CIP is flexible with a sizable portion focusing on system renewal and rehabilitation to address aging infrastructure and limit sanitary sewer overflows. While debt is projected to increase, the system generates significant free cash flow and has sizable cash balances, lowering the need for (and likelihood of) significant additional borrowings.